In case of an emergency, whether purely financial or related to another event such as a natural disaster or medical issue, you are grateful if you have built an emergency fund to get you through the difficult times. However, once the financial crisis is over, you have to go through the painstaking task of rebuilding that emergency fund.
First, relax and take a deep breath. You established an emergency fund in the first place, so you know that you can do it again. It may be more difficult or take longer this time, but you know you have the basic capability. Most of the steps will be exactly the same as you used to build your initial fund.
Summarize Your Situation/Start Planning – It is difficult to rebuild until you are sure the financial effects of the emergency are over, or at least until the full amount of future costs are known. Do you have open-ended medical bills to deal with? Are you fighting with the insurance company over reimbursement for your home's damages? Are you still in bankruptcy proceedings?
Address Short-Term Expenses – Contact all of your creditors that may be affected and ask for any adjustments that they can make given the situation. For example, utility and cable TV bills can be postponed and service shut off temporarily if your home is uninhabitable in the short term. Ask others for extended time or payment relief if needed.
Cut Expenses and Reset Your Budget – You will have to rebalance your budget to reflect your new reality. That may mean cutting almost all discretionary expenses for some time, including things you may not normally consider discretionary (such as cable TV or a premium telecommunications package).
Prioritize Your Bills – Start with expenses that are critical and can cause important losses if not paid (mortgage, insurance premiums, etc.). Next, pay as much as you can on other debts. Start with the minimum amount on all debts and pay extra toward the highest-interest rate debt if you can.
Stick With It – The first few months will be difficult. Try to leave a small amount for discretionary purchases so you do not lose hope, but adjust to a new level of discretionary spending until your emergency fund reaches its goal. You will eventually get back to your old level – unless you decide that you prefer saving that money instead.
Unfortunately, you cannot delay planning if your situation is dragging out. Make your best conservative estimate of the remaining costs (or potential income, such as insurance proceeds), and plan accordingly. It is wise to make a worst-case plan as well as a plan using your best estimates.
Review your income and short-term cash flow so you know how much money you have to work with. Do not be afraid to ask relief agencies for income and resource help if you qualify.
Take care of all necessary budget items first, then include a small amount to add to a rainy-day fund (short-term funds to avoid credit usage, perhaps a few hundred dollars) as well as an emergency fund (a few thousand dollars). Determine your goals for the time it should take to renew your emergency fund and set your savings rate accordingly.
The real challenge is to drive most of your recovery by cutting expenses instead of relying on credit. Heavy use of credit will divert your emergency funds toward paying high-interest charges. Resist charging more than you can pay off at the end of the month.
Rebuilding your emergency fund is not easy, but it is important – as recent events have shown you. Try to keep a positive attitude, and look forward to meeting your goal. Think of how outstanding it will feel when you finally reach your goal and can consider yourself fully recovered from your financial crisis.